The president of Connie Lee Insurance Co. last week defended his efforts to broaden the company's mandate, saying the bond insurer is seeking greater latitude because the largest private insurers have abandoned it as a reinsurance option.
Publicly discussing expansion for the first time, Oliver Sockwell, president and chief executive officer of Connie Lee, said the biggest players in the bond insurance business - AMBAC Indemnity Corp., Financial Guaranty Insurance Co., and Municipal Bond Investors Assurance Corp. - are not ceding premiums to Connie Lee.
Thus, Connie Lee - which is wholly owned by the College Construction Loan Insurance Association, a federal agency created in 1987 to guarantee loans for college building programs - has had to look elsewhere for business opportunities, Sockwell said. According to sources on Capitol Hill, the company recently lobbied Congress for permission to underwrite bonds in sectors other than higher education, where the company is currently restricted.
The effort failed amid strong opposition from the bond insurance community, but industry executives say they expect Connie Lee to revive the campaign next year.
"Congress intended to create us with a lesser level of government support than other" government-sponsored enterprises, Sockell said. "In order to do that, we have to have business flexibility similar to any private insurer." However, the firm's experience has not coincided with the original plan, he said.
At its inception, the private insurance firms lobbied for a "two-pronged" approach for Connie Lee, Sockwell said: It would insure triple-B-rated deals as a primary insurer and act as a reinsurer for the private insurers.
But MBIA recently canceled its treaty relationship with Connie Lee, and AMBAC and FGIC have never ceded premiums to Connie Lee, Sockwell said.
Since MBIA, AMBAC, and FGIC control 90% of the primary business, they effectively control reinsurance opportunities, he said.
"The effect of that is that they've in essence reneged on what was understood to be a good-faith compromise when Connie Lee was initially established," Sockwell said. "Legislative efforts are intended to replace the reinsurance business we're not getting by allowing us to serve other market sectors being overlooked by primary firms."
MMIA officials disputed Sockwell's version.
"The good-faith compromise with the Senate staff was to create Connie Lee as a reinsurer and we would reinsure business with them where there was a need," said Robert R. Godfrey, executive vice president at MBIA. "There was never in our recollection a commitment by anyone to make volume-specific commitments."
A spokesman for FGIC, which has been the industry's most outspoken opponent of Connie Lee's attempts to expand, said: "Since Connie Lee's founding, FGIC has purposefully no entered into any reinsurance agreements with them. And FGIC ha never indicated any change in this position."
AMBAC officials declined to comment. According to Standard & Poor's Corp., 95.4% of all premiums ceded to Connie Lee in the first nine months of 1993 were from Financial Security Assurance Inc.
Sockwell stopped short of accusing the larger firms of conspiring against Connie Lee, but said: "They do business with both of the other triple-A rated American monoline reinsurers and they do business with lower-rated and nonrated U.S. and foreign companies, and they don't do business with Connie Lee. So you can draw your own conclusions."
Godfrey said that while MBIA's treaty relationship with Connie Lee has been canceled, it is still wining to cede premiums to the company on a facultative basis.
"The reason MBIA and Connie Lee canceled their treaty relationship is because it was mutually agreed that the best [way] to go forward on was a facultative basis, he said. "We have from time to time called Connie Lee with facultative opportunities. They have done one for us this year."
In a treaty relationship, a reinsurer will accept all premiums in a predetermined sector. In a facultative agreement, specific credits are offered on a case-by-case basis.
The Connie Lee debate is reminiscent of the age-old chicken and egg question: Did Connie Lee seek an expansion of its mandate because it was being shut out on the reinsurance side by the large private primaries, or did the primaries cease ceding premiums to Connie Lee because they were expanding into new areas, threatening to directly compete with the private monoline insurers?
Privately, bond insurance officials say they assumed from its inception that Connie Lee would seek to compete with them directly and they did not want to help a potential competitor by ceding premiums to it.
"From day one they hired an individual to develop the primary market. He visited us and talked about how he was going to compete with us at the same time he was seeking to get reinsurance from us," said one insurance executive. "All of what's going on now was envisioned from the start."
Citing the experience of Asset Guaranty Insurance Co., one official pointed out that if a lack of reinsurance opportunities were the real reason Connie Lee was seeking to expand its charter they could find other niches. Asset Guaranty, a subsidiary of Enhance Financial Services Group, provides primary insurance in sectors the private firms typically shun.
In making his case to Congress, Sockwell argued that Connie Lee's triple-A rating could be at risk if the firm is forced to continue operating only in the limited world of higher education, according to congressional aides.
But Standard & Poor's recently put the argument to rest.
"S&P's AAA claims-paying ability rating on Connie Lee presently is not contingent upon expansion of the company's scope of business," the agency said in its annual review of the firm earlier this month. Moody's Investors Service does not rate Connie Lee.
Sockwell declined to comment specifically about whether the firm implied to Congress that its rating would be threatened if its mandate is not enlarged.
"The bottom line is that the U.S. government is a shareholder of Connie Lee. We discuss with all the shareholders how the business works and how potential changes in the future could impact [our] business and the marketplace," Sockwell said. "We have a continuing dialogue with Congress, and there certainly have been discussions about expanding Connie Lee into infrastructure, secondary, and primary education deals."
In 1992, Connie Lee was partially successful in its efforts to expand beyond its original mandate, despite staunch resistance from the private firms, led by FGIC. Connie Lee snared congressional approval to enhance $600 million of single-A or higher deals over a period of five years if they have first been passed over by the larger firms. The authorization allows Connie Lee to insure $100 million of A-rated deals in 1993, 1994, and 1995, and $150 million in 1996 and 1997.
To date in 1993, Connie Lee has only insured one single-A-rated issue, a $21 million deal for Foothill-DeAnza, California Community College District. But Arthur Grisi, a managing director at Standard & Poor's, said Connie Lee indicated it expects to close two more transactions before yearend, bringing its higher rated total close to the $100 million threshold.
A further expansion would probably benefit the firm, Grisi said, although congressional approval of a larger mandate for Connie Lee would force the agency to review the rating.
Expansion would be positive for Connie Lee because it would diversify the firm's portfolio of insured bonds, and a slightly lower capital charge would result if the firm moves into less risky areas, he said.
Even given its exposure to riskier market sectors, Connie Lee has demonstrated improvement by other measures, Standard & Poor's said in its affirmation of the AAA rating.
Most notably, the company showed improvement in its margin of safety - which measures excess capital relative to depression period losses - to a range of 1.4 times to 1.5 times currently from a range of 1.2 to 1.3 times at yearend 1992. The increase reflects the company's "successful transition from being a reinsurer to a primary insurer and the two-year track record established by the company's management in competing and growing in the primary market," the rating agency said.